The obvious question is : Why does Nation 2 use more K-intensive production techniques in both commodities than Nation 1 ?
3.3 Factor intensity, Factor abundance,
and the shape of the production frontier
3.3.1. factor intensity
The commodity Y is capital intensive if the capital-labor ratio (K/L) used in the production of Y is greater than K/L used in the production of X ( is not the absolute amount of K and L.)
To Ricardo, it is the differences in labor productivity between nations that constitute the basic principle of comparative advantage.
However, to Heckscher and Ohlin, it is the differences in cost of resources between nations that underlie the comparative advantage.
The H-O theory begins by assuming that labor and capital are the two main factors of production. Capital here means all the physical equipments used in production such as machines, vehicles of transportation, factory buildings and office supplies.
In 1933 Ohlin published International Trade”
“Interregional and
Ohlin was awarded the 1977 Nobel prize in economics for his contribution to the theory of international trade.
The effect of resource endowments on comparative advantage
Differences in
Differences in
relative resource → relative
Differences in
Pattern of
→ relative product → comparative
endowments
resource prices
prices
advantage
3.2. Assumptions of the theory
(1) two nations, two commodities (X,Y), and two factors of production (labor ,capital)
(2) Both nations use the same technology in production; (3) The same commodity is labor intensive in both nations
X --- labor intensive ;Y---- capital intensive (4) Constant returns to scale;
(9) No transportation costs, tariffs, or other obstructions to the free flow of international trade;
(10) All resources are fully employed;
(11) Trade is balanced.
In Nation 1, K/L in X: 1/4 in Y : 1
So, X is L- intensive commodity; Y is K-intensive
In Nation 2, K/L in X: 1 in Y: 4
So, X is L-intensive commodity, Y is K-intensive
Chapter 3 Neoclassical Trade Theories 3.1 Factor endowment theory (Heckscher-Ohlin theory)
In 1919, Heckscher published “The Effect of Foreign Trade on the Distribution of Income”
(5) Incomplete specialization in production; (6) Equal tastes in both nations;
(7) Perfect cor markets;
(8) Perfect internal but no international mobility of factor;
The theory defines the factor endowment or proportion as the capital-labor ratio, which refers to the ratio of the quantity of capital to the quantity of labor used in the process of producing goods.